Bitcoin Forum

Fractional reserve banking is a system where only a fraction (10%) of bank deposits are backed by actual cash on hand and available for withdrawal. This is done to theoretically expand the economy by freeing capital for lending. However, if there was a bank-run, it means that the bank might not be able to provide access to bank deposits.

Tether is based in a similar premise. Some argue that Tether is not fully backed. In other words, a fraction of "deposits" are invested in riskier financial instruments.

Which is more likely to result in chaos?

We are already used to many instances of bank runs and I guess no country is ever immune to this kind of economic malady especially if there can be big problems affecting the economy which may restrict the flow and availability of cash affecting banks. And of course, the usual remedy is for the central bank to come in, infuse the needed cash so that the bank can either be rehabilitated or in some cases go into the bankruptcy process. Now, with Tether, I think this is more of a problem of confidence because there are some doubts as to the way this digital asset is backed by real-world assets and in this case I think there would not be a collapse but a steady migration of users to other stablecoins which so far is not happening in a big way.

I wish it to be 10%. In my country its 0.5% .... It means that banking system can generate 200x the amount of money they actually hold because of another mechanism - money creation  (https://en.wikipedia.org/wiki/Money_creation)

After March 26, 2020 in US minimal reserve was set to ... 0%. Means that banks no longer need to have money to lend... They can lend as much as they want and in the situation of "bank-run" withdrawals will be locked, or we will see bail out and FED will simply print new currency units to patch the problem.